Commentary: Michigan Liquor Control Code Too Controlling

These are busy times for people in the alcohol business. A new state “Liquor Control Advisory Rules Committee” is being constituted by the Office of Regulatory Reinvention and may meet to review alcohol rules as early as the second week of August. Also, the Michigan Beer and Wine Wholesalers Association are meeting at the Grand Traverse Resort today, concluding their annual summer convention.

The MB&WWA represent some 60-plus beer and wine wholesalers statewide, and it doesn’t strain credulity to suggest that they will be discussing how best to protect the legal advantages they have won for themselves over the years, seeing written into law protective language such as territorial monopolies on the sale of beer and wine.

Consumers, taxpayers and many retailers should be hopeful that any changes proposed by lawmakers or the new advisory committee will serve their interests rather than further entrench the current beneficiaries of the state’s archaic regulatory regime.

The advisory committee may wish to begin with a comparative analysis of Michigan’s sister states. Wisconsin or Indiana generally operate with a lighter regulatory touch and might provide the Great Lakes State with a better model of alcohol control.

Following Prohibition, states developed their own liquor control models that generally split along two lines: “control states” and “free,” or license, states. In control states like Michigan, the government monopolizes the wholesaling of som alcohol, like spirits, before it is distributed through different channels. The state also heavily regulates the wholesaling, distribution and retail sales of beer and wine.

One way to examine the degree of regulatory excess is to count the words in state statutes and administrative rules created to “control” liquor distribution. Economists sometimes use word counts to measure certain phenomena, such as the economic growth consequences of verbose state constitutions, which can be an indicator and potential source of public policy rigidity.

For example, in a 2007 commentary in the scholarly journal “Public Choice,” Robert D. Tollison explains that constitutional economics “concerns how rules affect economic performance. …” It’s not much of a stretch to suggest that an over-abundance of liquor control rules may similarly have adverse effects on businesses and consumers.

Michigan’s liquor control code contains 74,029 words, the second longest of Midwest states. In addition, there are another 37,312 words in special rules promulgated by the state Liquor Control Commission itself. The LCC was born of a Prohibition-era desire to throttle abuses of an industry that had been run by gangsters for nearly 15 years. The bathtub gin producers are long gone, but some states like Michigan still operate with essentially the same regulatory framework.

In contrast, Wisconsin’s liquor control code contains 61,390 words, almost 20 percent fewer than Michigan’s. Moreover, Wisconsin gets along fine without an active regulatory agency engaging in endless micromanagement on top of the statutory requirements.

Indiana is an outlier in this story. Its code is a whopping 97,212 words, with 43,712 more in associated rules. Yet like Wisconsin, Indiana is a license state, as opposed to a control state, and so despite a wordy law it nevertheless arguably carries a lighter regulatory burden than either Michigan, Ohio (61,870 words of law and 27,566 words of rules) or Illinois (62,931 and 11,396).

For example, Indiana does not impose liquor price controls like Michigan, where the Legislature establishes a minimum shelf price. As I recently reported, that means liquor purchased in Angola, Ind., can be more than 20 percent cheaper than just over the border in Coldwater, Mich.

Other states regulate even more lightly than Wisconsin and Indiana. For example, Nevada’s liquor law is a rather curt 14,361 words, and the state maintains no official liquor rule-making body.

Despite all the regulatory overkill, the Michigan Liquor Control Commission has admitted that Michigan nevertheless suffers from rampant smuggling, writing in one report that the state loses $14 million each year to “illegal importation of alcohol.” It doesn’t take a doctorate in economics to recognize this as one likely outcome of the incentives created by regulating big price differentials on either side of a border.

The situation exacts a price in blood as well as treasure: An October 2007 LCC Bulletin reported that a liquor distribution driver was shot in a hijacking attempt, and that there had been several other hijackings involving distributors’ trucks. The same type of criminal behavior is seen with illicit cigarette trafficking, a direct result of large state tobacco tax differentials.

An LCC “Frequently Asked Questions” page lays the blame at the feet of “limited law enforcement resources” and “ineffective penalties,” but is silent regarding a state-imposed 65 percent liquor price mark-up that generates higher shelf prices.

A growing body of research suggests that the regulatory overkill does not necessarily increase public safety. For example, a 2010 study by the Virginia Public Policy Institute found no statistically significant difference between the 18 control states and 32 free states, as measured by overall drinking fatalities, or in separate categories of binge drinking and drunk driving.

Other data provide no clear support for regulatory heavy-handedness. A 2008 National Surveys on Drug Use and Health report, for instance, indicates that Michigan had a slightly lower rate of binge drinking among 12- to 17-year-olds (8.9 percent) than Nevada (9.2 percent) — but also had a 4.7 percent higher binge rate among 18- to 25-year-olds (44.2 percent vs. 39.5 percent).

Michigan likewise exceeds Nevada in the rate of “past month alcohol use” among 12- to 17-year-olds (15.6 percent versus 14.3 percent). In 2009, the two states tied for alcohol related traffic fatalities. However, between 2001 and 2005, Michigan experienced an overall alcohol-related death rate of 33.2 per 100,000 as opposed to 39.9 for Nevada, according to the Centers for Disease Control.

Public safety and liquor “sin” taxes are legitimate public policy issues, but that doesn’t mean mountains of statutory and administrative micromanagement generate better outcomes. States with a lighter regulatory touch haven’t fallen into alcohol anarchy, and Michigan probably wouldn’t either were we to rein in our own nanny state.


Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.